Securities Trader Representative (Series 57) Practice Exam

Under the Manning Rule, at what price must a broker-dealer protect a customer's limit order if a 10-cent markup is to be reported?

1. 20.10

2. 20

3. 19.90

4. Net price limit orders do not have to be protected

The correct answer is: 19.90

The correct answer pertains to the Manning Rule, which requires broker-dealers to protect customer limit orders by ensuring that they do not execute trades at a price that would disadvantage those orders. Specifically, when a limit order is placed, the broker-dealer needs to ensure that they do not execute a trade that would be below the limit order price if it could harm the customer. In the context of a 10-cent markup being reported, if a customer places a limit order at $20, the broker-dealer must ensure that they do not execute a trade at a price lower than $19.90. This is because if the broker-dealer marks up the price by 10 cents from the limit price, and that price is $20, the lowest price that would still allow for a 10-cent markup without violating the limit order would be $19.90. In this way, the Manning Rule protects the customer's interests by ensuring that their limit order is not executed to their disadvantage. Therefore, the rationale behind the answer is that a broker-dealer must respect the limit set by the customer while also adhering to the regulations regarding markups, thus leading to the necessity of protecting the order at or above $19.90.